Homework #3 (chapter 6)
Answer Section
MULTIPLE CHOICE
1.
ANS: E (there is a typo: 2008 to 2013 should read 2011 to 2016)
Step 1:
Calculate the DRP and LP using information for the 5year bond:
r
=
r*
+
IP
+
DRP
+
LP
+
MRP.
For the 5year corporate bond:
7.5%
=
2%
+
(2%
×
5)/5
+
DRP
+
LP
+
0.1%(5

1)
7.5%
=
2%
+
2%
+
DRP
+
LP
+
0.4%
3.1%
=
DRP
+
LP.
Step 2:
Calculate the average inflation rate for 2011 through 2016 by substituting the
information found in Step 1 using data for the 10year corporate bond:
8.2%
=
2%
+
(2%
×
5
+
5X)/10
+
3.1%
+
0.1%(10

1)
8.2%
=
2%
+
(10%
+
5X)/10
+
3.1%
+
0.9%
8.2%
=
6%
+
(10%
+
5X)/10
2.2%
=
(10%
+
5X)/10
22%
=
10%
+
5X
12%
=
5X
2.4%
=
X.
PTS:
1
DIF:
Medium/Hard
OBJ:
Part I TYPE: Problems
TOP:
Inflation rate
2.
ANS: A
We're given all the components to determine the yield on Gator Corp. bonds except the default risk premium
(DRP) and MRP. Calculate the MRP as 0.1%(10

1)
=
0.9%. Now, we can solve for the DRP as follows: 8%
=
3%
+
2.5%
+
0.9%
+
0.5%
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Summer '08
 Jochec
 Inflation, SEPTA Regional Rail, DRP, default risk premium

Click to edit the document details